Policy choices in the face of the coronavirus pandemic have caused what this book provocatively refers to as “the greatest economic collapse in US history”. The provocation lies in a statistical comparison with the Depression of the 1930s. Then the US economy shrank by nearly a third between 1929, the year of the Wall Street crash, and 1933. In today’s viral circumstances, the World Bank estimates that US gross domestic product fell by just 3.6 per cent in 2020 and projects positive growth thereafter.
There is nothing since the stock market collapse last March that resembles the policy inertia of Herbert Hoover’s administration after 1929. Monetary and fiscal activism has powered a complete stock market recovery. Nor is there any equivalent of Hoovervilles, the shanty towns that in the 1930s housed hundreds of thousands of homeless unemployed people across the country. So where is the depression?
The short answer is that there is no universally accepted definition of depression and the unemployment numbers may be a better guide to the economic and human misery inflicted by Sars-Cov-2 than GDP. The “real” jobless rate, which includes the percentage of Americans who want a job but have given up trying to find one, surged to 22.8 per cent last April. That is close to the 1930s experience.
James Rickards, a prolific writer who has worked in senior roles at several financial institutions, quotes with approval John Maynard Keynes’s definition of depression as a “chronic condition of subnormal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse”. He makes the important point that depressions are as much psychological as numeric. Risk aversion induced by the pandemic may entrench a high-saving, low-consumption mentality.
The book’s argument is that when unemployment declines, it will be from such a high level that hard times will persist for millions of workers. It warns of slow growth for 30 years.
Some might say that 30-year forecasts are for the birds and that this is anyway unduly pessimistic. Yet there are grounds for thinking that it might not be, especially if government policy is ill-judged. Since at least the financial crisis of 2007-08 growth has been excessively debt dependent. The fiscal response to the coronavirus ensures that debt to GDP ratios are ballooning. In the short and medium term deflationary pressure will be intense.
Companies with stretched balance sheets do not invest, which was the case in Japan for years after the bursting of its property and stock market bubble in 1990. For governments there is a risk of a premature return to austerity to reduce debt ratios.
At the same time productivity growth in the developed world has been poor since the financial crisis. This performance will be worsened because of diminished physical and human capital accumulation as a result of Sars-Cov-2. The remedies are structural reform and infrastructure investment. Yet part of the purpose of the central banks’ quantitative easing since the financial crisis was to buy time for structural reform. Very little happened. And can policymakers be trusted to use debt to finance growth enhancing investments?
Mr Rickards is not one to mince words. He thinks that lockdowns in the US were unnecessary and ineffective, based on official deception and bad science. They will, he argues, come to be seen as “one of the great blunders in history”. He nonetheless acknowledges their role in protecting healthcare infrastructure and buying time for vaccine development.
He is scathing about the Federal Reserve’s performance before and after the financial crisis and accuses Wall Street of fleecing savers and blowing up bubbles. And he calls on the Fed to devalue the dollar against gold as President Roosevelt did in the 1930s, an intriguing policy recommendation for the manager of the world’s predominant reserve currency. The book concludes with some sound advice to investors on how to structure a portfolio to deal with both the threat of deflation and inflation.
This is, then, a bracing collection of salvos and boutades — also one with many genuine insights, which make it an enjoyable book to argue with. Let’s just hope that the next 30 years are less bleak than Mr Rickards expects.
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